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Base formation completion and the Healthcare sector by Eoin Treacy

Base formation completion and the Healthcare sector

Eoin Treacy's view Healthcare is a very broad theme encompassing everything from residential care
and insurance to reliable dividend payers and cutting edge innovation. The healthcare,
energy and technology sectors share an ability to introduce efficiencies and
new practises which can radically improve how we live our lives. More than most,
these sectors have the ability to literally create value and are therefore worth
monitoring for their potential to represent the 'next big thing'.

On March
5th 2010, I clicked through the constituents of the Nasdaq-100 looking for
shares which were completing long-term bases. I did not know it at the time
but exposure to cloud computing was a theme common to almost all of the technology
results. At the time a number of pharmaceuticals were also moving to a position
of outperformance but the crowd appeared to be focusing more on technology.

In yesterday's
piece focusing on shares hitting new highs, two healthcare stocks particularly
attracted my attention. Biogen completed
a very lengthy base within the last year and Bristol Myers Squibb appears to
be in the process of doing the same. Base formation completion is a sufficiently
rare occurrence that it prompted me to attempt to ascertain whether there are
other healthcare shares completing lengthy bases.

To do
this I used the Chart Library High/Low Filter to scan the constituents of NYSE,
AMEX and the Nasdaq Composite for shares that hit at least new 3-month highs
or lows in the last five days. There were 1294 results. I next used Bloomberg
to identify sectors and subsectors for these shares. The various segments of
the Healthcare sector were well represented in the list. The presence of many
food and restaurant as well as apparel companies was also noteworthy. I will
concentrate on these in a subsequent review. I next isolated 114
healthcare related shares that have made at least new 3-month highs in the
last five days. By excluding insurance, REITS and hospital shares from my review,
the number was decreased further. I put these shares into a section of my Favourites
and used the 'View All Charts' function to quickly scan through the charts on
a 20-year basis.

The Biotech
segment has a number of companies which remain in impressively consistent uptrends.
In this review I will concentrate on those completing long-term bases. Cubist
Pharmaceuticals ranged mostly between $17 and $27 from late 2005 until March
when it broke upwards. It found support in the region of the 200-day MA in early
August and broke upwards again last week. A sustained move below $30 would now
be required to begin to question medium-term scope for additional upside. Immunogen
also appears to be in the process of completing a first step above its almost
decade long base. Nymox Pharmaceuticals
(market cap $300 million) has a similar pattern.

ArQute,
and Curis (markets caps of around $300
million) all remain within their respective bases but have exhibited progressions
of higher reaction lows for the last couple of years. At a minimum this suggests
demand is returning to dominance at incrementally higher levels. Micromet
is somewhat larger but also remains in its base. It rallied this week to break
the progression of lower rally highs. Sustained moves up out of their lengthy
congestion areas will be required to indicate a return to medium-term demand
dominance.

In the
pharmaceuticals sector, OPKO Health shares
a similar pattern with Bristol-Myer Squibb.
It has posted a progression of higher reaction lows since early 2009 and is
now testing the 2007 peak. Vivus has
held a progression of higher reaction lows since early 2009 and has returned
to test the $10 area. A sustained move above that level would confirm the return
of demand dominance. Alkermes and ViroPharma
share a similar pattern. Pharmacyclics
appears to be in the process of completing a first step above its base.

In the
medical devices sector, Spectranetics
($268 million market cap) recently found support in the region of $5 and a sustained
move below it would be required to question current scope for additional upside.
AngioDynamics ($400 million market cap)
is rallying towards the upper side of its almost four-year base. Thoratec
tested the upper side of its base in January and remains in a relatively consistent
medium-term uptrend.

On this
cursory examination, there are a significant number of companies which appear
to be in the process of completing lengthy bases. In this piece I did not discuss
the sector's leaders, a number of which are hitting new all time highs. Healthcare
is going through an evolution. New treatments, technology and practices promise
to enhance our lives. The investment crowd appears to be getting behind an increasingly
large number of companies offering exposure to this broad theme.

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